In accounting terms, operating expenses (OE) and cost of goods sold (COGS) are both considered expense accounts. In short, they measure different ways in which resources are spent in the process of running a business. They are segregated on an income statement in part to see how much a product’s resources cost versus how much it costs a business to turn those resources into a consumer good.
First and foremost, operating expense is one of the financial factors that affect the service industry. Operating expenses are expenses associated with the maintenance and administration of a business on a day-to-day basis. Operating expenses primarily consist of the money you must put out to stay in business. It includes your office space, utilities, transportation and supplies. Overhead operating expenses often is undervalued because so many costs are indirect and difficult to predict. The cost of gas, for example, changes regularly and
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On an income statement, profit calculated by deducting the cost of goods sold from total net sales is called gross profit. Gross profit has a meaningful role in the profitability of a company. (Hirst 2013). The COGS includes both fixed costs and variable production costs. Both types of production costs can reduce gross profits. However, fixed production costs, such as buildings and equipment, are unaffected by production levels, whereas variable costs, such as the wages paid to factory workers and the cost of raw materials increase when production levels rise.
At the second level of profitability, operating profit is calculated by subtracting operating expenses from gross profit. It also known as sales, general and administrative expenses (SG&A), these are overhead expenses not directly related to production. SG&A typically includes the cost of administrative buildings, as opposed to production plants, the salaries of salespeople and executives, and expenditures for office
Operating budgets are budgets that deal mainly with the day-to-day operations of a facility. This may include wages, utilities, rent, and items purchased that have the intent of lasting less than a year (Johnston, n.d). This type budget provides the needed information regarding the cash on hand needed to operate the facility during a fiscal year. Capital expenditure budgets deal with more long term items such as equipment or property. As stated by Johnston (n.d.), it is necessary to have a capital budget for continued growth of the business. You complete this task by purchasing assets that produce an income. Capital expenditure budget have the potential to cover a five- to ten-year period (Baker & Baker, 2014, p.174). Items included in the capital expenditure budget may also include loan interest and bondholder's interest. The operating budget and the capital expenditure budget interact with one another. To demonstrate an example: a healthcare facility purchases a chemistry analyzer for its clinical laboratory. The chemistry analyzer is placed in the capital expenditure budget, but the maintenance for the analyzer is placed in the operational budget. The capital expenditure expense is the chemistry analyzer, but the materials used to maintain the chemistry analyzer are operational expense.
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
When a company purchases raw materials it will be recorded in Raw Material inventory. Once the raw materials are used, their costs are transferred to the Work in Process inventory account as direct material. Moreover, direct labor and overhead costs are also charged to the Work in Process inventory (http://novellaqalive2.mhhe.com/sites/0073379417/student_view0/ebook/chapter2/chbody3/product_cost_flows.html). As the process of a production is complete, the goods are transferred to the Finished Goods inventory, and then the finished products are sold. Once the products are sold, the costs are transferred to the Cost of Goods
Alex goes back to his office and shares this information with a man from production and a lady from accounting. They all come to the conclusion that “throughput is the money coming in” “inventory is the money currently inside the system” and “operational expense is the money we have to pay out to make throughput happen.”
The Real Cost: Contract is a commercial that was released October 31, 2014 across multi-wide media, TV, Radio, Print, and digital causes a bright side of controversy for teens who were expected to be in use of Tobacco. The commercial shows a list of scenes in an average teen life while also the slow effects of losing free time and your own time with the use of cigarettes. It’s not the typical anti-smoking commercial because instead of just saying don’t smoke its digs in the feel of teen emotion towards how they chose to live there life and what decisions that are willing to make. The commercial features a teenage girl narrating normal events in her lifestyle talking in a way she’s stepping up in her life to find herself when initially
From a P&L standpoint, a dollar saved in vendor cost is reflected as a dollar increase in profit (and cash on hand) where as a dollar increase in sales is only marginally reflected in profit once you subtract operating cost:
Budgeting Assignment A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of a manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496)
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
Project managers must take cost estimates seriously if they want to complete software projects within budget constraints. After developing a good resource requirements list, project managers and their software development teams must develop several estimates of the costs for these resources. There are several different tools and techniques available for accomplishing good cost estimation.
Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Role of Cost Accounting: Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company?s financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged.
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
Accurately forecasting the cost of projects is vital to the survival of any business or organization. Cost estimators develop the cost information that business owners or managers, professional design team members, and construction contractors need to make budgetary and feasibility determinations. From an Owner's perspective the cost estimate may be used to determine the project scope or whether the project should proceed. According to the U.S. Department of Labor there were about 198,000 cost estimators in 1994. That of which 58% work in the construction industry, 17% employed in manufacturing industries, and the remaining 25% elsewhere. From this we could conclude that a great deal of cost estimation lies in the construction industry, where multi-million dollar contracts are formed after a thorough cost estimation.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
The statement of profit or loss is also known as income statement and it’s equation is revenue minus expenses equals profit or loss. The statement of profit or loss summarize the revenues and expenses of a business and also shown the ability of a business to generated business. The total profit or loss that generated in an organization during an accounting period can be seen through the income statement. For example, if the expenses of the company are higher than revenues, the company will get a loss in the business. However, the company will generate a profit when the revenues are greater than the